Measuring Consumer Freedom

Abstract

We provide a theoretical framework for the measurement of freedom of choice from consumer data. In a first step, we provide an axiomatic foundation for an entropy-based freedom measure via an impartial observer theorem in which the impartial observer has probabilistic beliefs about individuals' choices. Consumer freedom is measured by applying the characterized freedom measure to the decision of how to allocate expenditure across goods. In a second step, we employ the measurement framework to estimate consumer freedom for the United States between 2004 and 2017 using a representative consumer panel. Our estimation results show stagnant consumer freedom of choice between 2004 and 2009 and a substantial increase in freedom of choice between 2010 and 2017. For policy analysis, the measure provides a cardinal welfare criterion based purely on choice data.

Joint work with Tzu-Ying Chen